Raising the debt ceiling

The struggle continues

Time is running out to avert an unnecessary disaster

“THE fact that we are here today to debate raising America’s debt limit is a sign of leadership failure.” So said a young senator from Illinois in 2006. He went on to explain that he would vote against raising the debt ceiling (the legal limit on how much the government may borrow), because America’s rising debt was “a hidden domestic enemy” that robbed cities of investment, children of schools and old people of their pensions.

The Barack Obama of 2013 has a different view. He now argues that failing to raise the debt ceiling would be irresponsible, since it would risk a catastrophic default. America has not defaulted on a loan since it discovered borrowing in 1790, and probably won’t this time, either. But the president is right to be alarmed.

With parts of the federal government still shut down, attempts to fix one crisis are on hold while another, more serious, one approaches. Around October 17th the Treasury will run out of room to shuffle money around to meet its obligations. Soon after, the government may or may not be able to delay payments to contractors, pensioners and other claimants, so as to avoid a default on the national debt. The Treasury says that its computer systems will not allow it to prioritise in this way. Given the difficulty the government has had running a website where people can buy health insurance (see article), this rings true. In any case it may be illegal, not to mention unpopular, to pay bondholders in Beijing before pensioners in Pittsburgh. That there is even a debate about this is worrying.

On October 10th, ahead of a meeting with Mr Obama, Republican leaders in the House of Representatives said they would offer a six-week "clean" extension of the debt limit. Under the plan, however, Treasury would not, at the end of the six weeks, be allowed to shuffle money between government accounts to gain additional months of flexibility.

The debt ceiling was introduced as a way to make financing the first world war easier: before 1917 each new bond issue had to be voted on. It has been raised frequently since then, under presidents from both parties. Still, voting to allow the government to borrow even more looks profligate, so congressmen in the party opposed to the president have often voted no, as Mr Obama did during George W. Bush’s presidency. “A spectre that has been putting in an appearance more or less regularly every year…is back to haunt the administration,” wrote the New York Times of a debt-ceiling tussle in 1958.

Until recently this piece of theatre followed a familiar script. Negotiations over the debt ceiling would get wrapped up in dealmaking over the budget. Some ground would be given on totemic issues: Democrats persuaded Ronald Reagan to reduce military spending; Republicans secured cuts in Medicaid from Bill Clinton. The Treasury resorted to accounting trickery to delay the deadline and then a deal would be done at the last minute. When the party occupying the White House changed, so did its position on the ills of authorising more borrowing: under George W. Bush, the party that had railed against raising the debt ceiling raised it seven times.

There are two reasons to fear that things may be different this time. First, although most lawmakers in both parties know it would be daffy to dice with default, the same people also wanted to avoid a shutdown. Yet it happened: much food inspection has ceased; trials of new medicine at the National Institutes of Health are on hold; legions of federal employees are stuck at home watching “The Young and the Restless”.

Second, some Republicans in Congress do not believe that failing to raise the debt ceiling would be a disaster. Some argue that suddenly forcing the government to spend no more than it raises in taxes would make it leaner and fitter. Many voters are equally sanguine. A Pew poll found that 39% of Americans believe Congress could avoid raising the debt limit without any great economic consequences—about the same proportion who favoured shutting down the government to defund Obamacare. The lawmakers who share these views see themselves as ending business-as-usual in Washington, DC. That makes it hard for them to cut the ideologically impure deals that might end the stand-off.

At first Republicans insisted that the president should kill health reform—his biggest achievement—in exchange for keeping the government open. They appear to have retreated from this demand, which Norm Ornstein of the American Enterprise Institute, a think-tank, likens to a union threatening not merely to call a strike but to blow up the factory unless it gets what it wants. Now, in exchange for raising the borrowing limit, House Republicans are proposing a committee to look at deficits as the precursor to a grand bargain to put America’s finances in order. This is a fine idea, except that there is no time to make it work before October 17th. House Republicans have also said that any such bargain could not involve tax rises: ie, that Democrats must do all the compromising.

Brinkmanship over the debt ceiling in 2011 hurt the economy. Mr Obama says that if he bows to intimidation this time, it would hamstring future presidents. He feels as strongly about this as about any issue, says an aide. Policy uncertainty is now worse than you might expect during a war (see chart), and this spooks investors (see article).

Some sort of short-term deal to avert a crisis seems the likeliest outcome—the standoff is hurting Republicans in opinion polls. But it is not certain, and might only delay the reckoning. America seems locked in the political equivalent of an Icelandic saga, with both sides taking revenge for an original wrong which neither remembers clearly. In those stories the multi-generational violence only ended when the families involved were so sick of it that one made a big gesture to break the cycle. That point has not yet arrived.